The mortgage interest rate deduction saves many homeowners thousands of dollars on their taxes. With the new administration coming into the White House in January, rumor has it things might change. President Elect Trump does not have any qualms about putting a much smaller cap on the interest rate deduction. This could affect homeowners, but not as many as it may seem.
What Borrowers Can Deduct
Right now, borrowers are able to deduct most or all of the interest they pay in any given year. This is different from a credit, though. You do not get dollar for dollar on the interest you deduct. Instead, you are able to deduct the amount of interest you pay on a primary residence from your taxable income. This reduces your tax liability by removing the money you paid towards interest from your tax liability. A tax credit, on the other hand, would directly reduce your tax liability by taking away from the amount you owe.
Who Can Use the Mortgage Interest Rate Deduction?
As it stands right now, many Americans are able to use the mortgage interest rate deduction as long as they meet the following:
- They file their taxes
- They itemize their deductions on Schedule A
- You have a mortgage on the property
- Your mortgage cannot exceed $1,000,000 (if married) and $500,000 (if single)
This encompasses a large number of homeowners in America today.
How Will the Deduction Change?
If the Trump administration gets their way, the limit will decrease from $1,000,000 to $100,000 for primary residences. This does sound drastic, but there is a catch. The Trump administration is not just doing away with the mortgage interest deduction. They are trying to minimize the number of people who use the itemized deduction option on their tax returns. Instead, he wants people to take the standard deduction. Right now, the standard deduction equals $12,600, but Trump would increase it to $30,000. This would make up for the decrease in the interest deduction.
The Real Estate Industry Worry
While it makes sense that homeowners worry about the change to their tax liability, the real estate industry has even more to worry about. The mortgage interest deduction serves as an incentive for people to purchase a home. There is a large difference when you are able to deduct $15,000 or more from your income. Your tax liability decreases dramatically. This convinces many people to become homeowners that would otherwise have rented or used a land contract. If the deduction goes away or decreases too much, people might not be as willing to purchase a home because of the tremendous responsibility that goes along with it.
The real estate industry is most concerned about millennials. They have seen the worst of everything. They watched their parents who worked their entire lives to have a beautiful home either lose it or wipe out their life savings. This is something real estate professionals have to compete with as millennials become old enough to purchase their own homes.
The tax deduction is incentive for these millennials to purchase a home. If Trump gets his way, though, the incentive could disappear. Because home ownership is already low, this could really harm the housing industry.
Despite the positive changes Trump plans to put in place, there is an emotional barrier people associate with the mortgage interest deduction. If that piece goes away, the housing industry could find itself in a bad place yet again.
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